Learning how to invest in gold right now is essential, as this commodity can help balance out your overall portfolio. We explore why you should consider investing in gold and how to do it.
This is not the best investing option unless it’s extremely expensive jewelry that may hold its value.
Bullion, bars, and coins
These are the best option for owning physical gold. However, there are markups to consider. The money it takes to turn raw gold into a coin is often passed on to the end customer. Also, most coin dealers will add a markup to their prices to compensate them for acting as middlemen.
Another way to get direct exposure to gold without physically owning it, gold certificates are notes issued by a company that owns gold. These notes are usually for unallocated gold, meaning there’s no specific gold associated with the certificate, but the company says it has enough to back all outstanding certificates. You can buy allocated gold certificates, but the costs are higher.
If you don’t particularly care about holding the gold you own but want direct exposure to the metal, then an exchange-traded fund (ETF) like SPDR Gold Shares is probably the way to go. This fund directly purchases gold on behalf of its shareholders. You’ll likely have to pay a commission to trade an ETF, and there will be a management fee (SPDR Gold Share’s expense ratio is 0.40%), but you’ll benefit from a liquid asset that invests directly in gold coins, bullion, and bars.
Another way to own gold indirectly, futures contracts are a highly leveraged and risky choice that is inappropriate for beginners. Essentially, a futures contract is an agreement between a buyer and a seller to exchange a specified amount of gold at a specified future date and price. As gold prices move up and down, the value of the contract fluctuates, with the accounts of the seller and buyer adjusted accordingly. Futures contracts are generally traded on exchanges, so you’d need to talk to your broker to see if it supports them.
Gold mining stocks
One major issue with a direct investment in gold is that there’s no growth potential. An ounce of gold today will be the same ounce of gold 100 years from now. That’s one of the key reasons famed investor Warren Buffett doesn’t like gold — it is, essentially, an unproductive asset.
This is why some investors turn to mining stocks. Their prices tend to follow the prices of the commodities on which they focus; however, because miners are running businesses that can expand over time, investors can benefit from increasing production. This can provide upside that owning physical gold never will.
However, running a business also comes with the accompanying risks. Mines don’t always produce as much gold as expected, workers sometimes go on strike, and disasters like a mine collapse or deadly gas leak can halt production and even cost lives. All in all, gold miners can perform better or worse than gold — depending on what’s going on at that particular miner.
If you’re looking for a single investment that provides broadly diversified exposure to gold miners, then low-cost index-based ETFs like VanEck Vectors Gold Miners ETF and VanEck Vectors Junior Gold Miners ETF are a good option. Both also have exposure to other metals, but the latter focuses on smaller miners; their expense ratios are 0.53% and 0.54%, respectively.
Investors who prefer the idea of owning mining stocks over direct gold exposure can effectively own a portfolio of miners by investing in a mutual fund.
Streaming and royalty companies
For most investors, buying stock in a streaming and royalty company is probably the best all-around option for investing in gold. These companies provide miners with cash up front for the right to buy gold and other metals from specific mines at reduced rates in the future. They are like specialty finance companies that get paid in gold, allowing them to avoid many of the headaches and risks associated with running a mine.
Why invest in gold?
You might choose to invest in gold a safe haven, to diversify your portfolio or a as a hedging asset. Each investor will have unique reasons for investing in precious metals. Remember, the key to successful investment largely depends on the asset you choose. While gold can prove to be an excellent investment, success is highly dependent on your personal circumstance and the suitability of your portfolio.
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